Big Bank Break-Up Is Already Under Way

Regulators won't break up banks, but the markets will, according to KBW political analyst Brian Gardner.

NEW YORK ( TheStreet) -- Don't expect regulators to break up big banks anytime soon. They are hoping that the market will do it for them.

"Through regulation, stress tests and Basel Capital standards, they are going to make life uncomfortable for big banks," according to KBW political analyst Brian Gardner. "The multiples of large banks already lag that of regionals. What regulators would like to see is shareholders step in and force bank managements to break up their banks," he says.

The call to break up big banks has strengthened after Federal Reserve Chairman Ben Bernanke admitted for the first time at a recent conference that "Too Big to Fail is not solved and gone. It is still here."

"'Too Big To Fail' was a major source of the crisis and we will not have successfully responded to the crisis if we do not address that successfully," Bernanke told reporters.

Bernanke was acknowledging what many big bank critics including Massachusetts Senator Elizabeth Warren have been arguing -- that the market still expects big banks to be rescued in a crisis, even though new rules under the Dodd Frank Act are designed to prevent future bailouts.

The market's perception, however misplaced, gives big banks a funding advantage over smaller banks in the market. A Bloombergstudy estimated this implicit market subsidy to be over $80 billion, though some in the financial industry have disputed that number.

The perception that banks are too big to fail also may provide banks with an incentive to take on more risk.

Stirring up even more controversy, Attorney General Eric Holder recently said that the size of some financial institutions and their impact on the economy weighed on the Department of Justice's ability to successfully prosecute them. In effect big banks were now "Too Big to Jail."

That has led to more calls to break up the big banks from both sides of the political aisle. Ohio Democrat Senator Sherrod Brown and Louisiana Republican Senator David Vitter are crafting legislation that would cap the size of big banks.